The IRS released a revised Form W-4P (Withholding Certificate for Periodic Pension or Annuity Payments) and a new Form W-4R (Withholding Certificate for Nonperiodic Payments and Eligible Rollover Distributions) that include substantial changes to the federal tax withholding elections available, as well as changes to the calculation CalSTRS performs to determine the amount to be withheld, as of January 1, 2023.
A significant change to the W-4P form is that filers will no longer be able to adjust their withholding by electing a specific number of withholding allowances. The IRS now offers new input fields for increasing or decreasing the amount to withhold, including fields for tax credits and deductions.
CalSTRS members and beneficiaries who already receive ongoing payments and who do not wish to make changes to their federal tax withholding elections are not required to file a new form.
2023 federal tax withholding changes
The federal Tax Cuts and Jobs Act of 2017 changed the way income tax is calculated. Among the changes is an increased standard deduction and removal of the dependent exemption. While the IRS did not immediately change procedures for calculating federal income tax withholding to coincide with the removal of the dependent exemption, which withholding allowances were tied to, it is doing so now.
Previously, federal tax withholding calculations for non-rollover eligible periodic payments were based on the filing status (married or single) and number of withholding allowances reported on your federal tax withholding election form. The new calculation allows an additional filing status of “head of household” and discontinues the use of withholding allowances. It also allows new fields for adjusting the amount to be withheld by incorporating other income, deductions and tax credits into the calculation.
While the new form and calculation are more complex, they more accurately approximate the amount of tax due at the end of the year when completed correctly.
Previously, federal tax withholding for non-periodic (lump-sum) and rollover eligible periodic payments was either 10% (non-rollover eligible, non-periodic payments) or 20% (all rollover eligible payments, whether periodic or non-periodic). The 10% withholding for non-rollover eligible non-periodic payments was optional and the 20% withholding for all rollover eligible payments was mandatory.
While both rules still apply, you may also designate a specific percentage higher or lower than the default rate, as long as it is at least the mandatory percentage when it applies.
No, if you are receiving ongoing benefits and you do not wish to change your withholding elections, you are not required to submit a new tax withholding election form.
We will continue to withhold federal income tax from your benefit payments based on the elections we have on file, including the number of withholding allowances.
If you make no changes to your federal tax withholding elections, we will continue to use the marital status, number of withholding allowances, and additional withholding amount we have on file to calculate your withholding. However, the actual amount withheld may change due to a difference in rounding when we transition from the current monthly tax withholding tables to the new annual tax withholding tables.
Your federal tax withholding may also change when tax tables are updated annually or when your benefit amount changes.
Withholding allowances are no longer used to calculate federal tax withholding. Accordingly, CalSTRS’ new Form AD-0908 (Income Tax Withholding Preference Certificate) does not contain a field for withholding allowances as they are not part of the new calculation method.
When you file a new federal income tax withholding election form, any existing withholding allowances will cease to be used, and your federal tax withholding will be calculated using the new method. Use the instructions and worksheets on IRS Form W-4P (Withholding Certificate for Periodic Pension or Annuity Payments) at irs.gov to assist you in completing your Income Tax Withholding Preference Certificate form.
Any new benefits beginning on or after January 1, 2023, are subject to the new form and calculation. Also, any changes in federal tax withholding elections that take effect on or after that date must use the new form fields and calculation method.
We expect to make the new form available in fall 2022.
We plan to roll out the new tax withholding functionality in early December 2022. The exact cut-off date for updates using the old format is yet to be determined and will vary depending on whether changes are submitted online through myCalSTRS or by mail using a paper form.
We expect to continue accepting changes using the existing format, including withholding allowances, through summer 2022.
We expect you’ll be able to update your tax withholding elections using paper forms in fall 2022 for changes to take effect January 1, 2023.
We expect you’ll be able to change your withholding elections online in early December 2022.
See IRS Publication 15-T at irs.gov for more information.
Additional tax information
If you do not elect a tax withholding preference, CalSTRS will still withhold federal and state taxes based on the following:
- Non-Rollover Eligible Distributions: Federal withholding will be married with three allowances. State withholding will be married with three allowances.
- Eligible Rollover Distributions: Federal withholding will be 20%. State withholding will be 2%.
Generally, the method and rate of withholding depends on whether:
- The payment is rollover eligible.
- The payment is delivered outside the U.S.
- You are a nonresident alien individual, a nonresident alien beneficiary, or a foreign estate.
Special withholding rules apply to payments outside the U.S. and payments to a foreign person.
Your tax withholding options also depend on your benefit type and whether the payment is eligible for rollover distribution.
If you are receiving a monthly benefit that is not eligible for rollover distribution, you may elect one or more of the following options:
- No federal tax withholding.
- Withholding federal income tax based on the tax table.
- An additional amount withheld from each benefit payment.
If you receive a distribution that is eligible for rollover but you do not roll it over directly to another qualified retirement plan or IRA, your payment is taxable.
The federal tax rate for an eligible rollover distribution is 20%. You may also elect an additional amount withheld. CalSTRS is required to withhold the 20%. You cannot opt out of federal tax withholding for eligible rollover distributions. CalSTRS will not withhold the 20% federal income tax for rollover eligible distributions transferred directly to an IRA or other qualified plan.
You have more flexibility with state tax withholding for eligible rollover distributions. State taxes will be 2% unless you elect one of the following options:
- No state taxes withheld.
- A flat tax amount.
Caution: There are penalties for not paying enough federal tax during the year either through withholding or estimated tax payments. See IRS Publication 505, Tax Withholding and Estimated Tax, at IRS.gov for more information.
Some payments from CalSTRS are eligible rollover distributions. This means that they can be rolled over to a qualified IRA or to an eligible employer plan that accepts rollovers.
CalSTRS payments cannot be rolled over to a SIMPLE IRA or a Coverdell Education Savings Account.
You cannot roll over a payment if it is part of a series of equal (or almost equal) payments that are made at least once a year and that will last for any of the following:
- Your lifetime (or a period measured by your life expectancy).
- Your lifetime and your beneficiary´s lifetime (or a period measured by your joint life expectancies).
- A period of 10 years or more.
Beginning when you reach age 72 (age 70½ if you were born prior to July 1, 1949) or retire, whichever is later, a certain portion of your payment cannot be rolled over because it is a required minimum distribution that must be paid to you under federal law.
CalSTRS will tell you what, if any, portion of your payment is not an eligible rollover distribution. For more information on these rules, see the CalSTRS publication, Tax Considerations for Rollovers
To calculate the amount of tax withholding, use IRS Form W-4P, Withholding Certificate for Pension or Annuity Payments, available at IRS.gov.
Your income tax withholding preferences will remain in effect until you change them.
Because your tax situation may change from year to year, you may want to review your withholding each year.
Under federal law, the State of California cannot tax your benefit payments if you reside outside California.
If you do not live in California but think you may be liable for California state income tax, you may request CalSTRS to withhold state income taxes.
If you receive different types of monthly payments from CalSTRS, you may elect a different tax withholding amount for each type of payment.
You may also complete a separate Income Tax Withholding Preference Certificate for each payment type and mail it to CalSTRS.
When you submit the Income Tax Withholding Preference Certificate and mail it to us, the new elections will take effect within 60 days after we receive the information. If you change your tax withholding preferences on myCalSTRS, the request immediately replaces your existing tax withholding preference.
If you elect to have tax withholding based on the tax table, you might not have any taxes withheld from your monthly benefit. This will occur in cases where the monthly taxable allowance is below the minimum amount required for withholding based upon the tax table you have elected.
Quarterly supplemental payments are made to some retired members and beneficiaries to maintain 85% of the purchasing power of their initial retirement benefit. All supplemental payments made after January 1, 2003, are taxed at the same tax preference as the monthly benefit if taxes are withheld based on the tax tables. There are three exceptions to this rule:
- If you are having taxes withheld from your monthly payment at a flat rate, no taxes will be withheld from your supplemental payment.
- If you are using the tax tables and have an additional flat amount withheld, only the tax table amounts will apply to the supplemental payment. No additional amounts will be withheld.
- If your quarterly supplemental payment falls below the minimum required for the tax table you elected, you may not have taxes withheld.
Lump-sum distributions, including a refund of your contributions, are subject to special tax provisions.
For more information on these rules, see the CalSTRS publication, Tax Considerations for Rollovers.